1.) According to Markowitz’s portfolio theory, how are the Efficient Portfolio Frontier and the Tangency Portfolio defined for a given set of risky assets? What investor preferences are considered when selecting a portfolio in Markowitz’s theory? Would an investor ever have a reason to choose a portfolio other than the Tangency Portfolio in Markowitz’s theory? Why or why not? If you use any symbols, be sure to define them in words so that we all know what the symbol(s) represent(s) (for example: ρ = rho = correlation coefficient.

2.)Describe how limited liability protects business owners. What is the relationship between business owners of a C-corporation in the United States and investors who own stock in the same C-corporation? Would you expect the presence of limited liability to make investing more or less attractive to investors (where more attractive means investors are more likely to invest, and less attractive means investors are less likely to invest)? Why?

3.) Consider a borrower that is approved for a standard 30-year, fully amortizing mortgage with an original balance of $270,000 and a note rate of 4.25%. (“Standard” refers to a fixed-rate mortgage contract with level payments) (a) If the borrower purchases a house that is appraised for $346,154, what is the borrower’s loan-to value ratio (LTV)? How does the bank use this number to decide whether to accept or deny the loan? (b) Assume the borrower does not prepay or default on the loan. Write down part of the amortization table, limiting attention to months 1, 2, 359, and 360 (where month 1 indicates the end of month 1 when the first payment is made). Your amortization schedule should include four columns: (1) Month, (2) Interest Payment, (3) Principal Payment, and (4) Remaining Mortgage Balance (immediately after the payment for that month is made).

4.) Suppose you have a standard coupon bond with a principal value of $30,000 that matures in three years. The coupon rate is 3.5% and the coupon is paid annually with the first payment due 12 months from today. (“Standard” refers to a non-callable bond contract.) (a) If the yield to maturity (YTM) is 3%, what is the price of the bond today? (b) Suppose the price moves to $29,583.74. What is the new YTM? (c) Now suppose the original bond from part (a) pays coupon semi-annually instead of annually ($30,000 principal value, 3.5% coupon, matures in three years, first coupon payment due in 6 months). What is the price of this new bond?